U.S. homebuilding weakens again, hurricanes muddy outlook

Lucia Mutikani

A worker installs a metal roof on the top of a single story family home being built in San Diego, California, U.S., July 17, 2017.

Reuters/Mike Blake

WASHINGTON (Reuters) - U.S. homebuilding fell for a second straight month in August as a rebound in the construction of single-family houses was offset by persistent weakness in the volatile multifamily home segment.

The report from the Commerce Department on Tuesday also showed building permits racing to a seven-month high in August. However, permits for single-family homebuilding, which accounts for the largest share of the housing market, dropped.

The mixed readings suggested housing could remain a drag on economic growth in the third quarter. Homebuilding has been treading water for much of this year amid shortages of land and skilled labor as well as rising costs of building materials.

Housing starts slipped 0.8 percent to a seasonally adjusted annual rate of 1.18 million units, the Commerce Department said. Starts for July were revised higher by 35,000 units. Building permits surged 5.7 percent to a rate of 1.30 million units in August, the highest level since January.

The data suggested limited impact on permits from Hurricane Harvey, which lashed Texas in late August and caused unprecedented flooding in Houston. The Commerce Department said the response rate from areas affected by the storm "was not significantly lower."

Harvey, however, appeared to have held down home completions, which tumbled 10.2 percent to a 10-month low. The percentage drop in completions was the largest since April 2013. Completions in the South fell 22.2 percent, the biggest drop in seven years.

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Homebuilding could slump further in September in the aftermath of Harvey and Hurricane Irma, which struck Florida. According to Census Bureau data, the areas in Texas and Florida that were devastated by the storms accounted for about 13 percent of permits issued in the nation last year.

Though activity could pick up as the hurricane-ravaged communities rebuild, the dearth of labor could curb the pace of increase in homebuilding. A survey Monday showed confidence among homebuilders fell in September amid concerns that the hurricanes could worsen the labor shortages and make building materials more expensive.

"With the pace of housing starts in July and August retreating, and a likely depressed September, we now anticipate that housing starts will fail to expand much, if at all, in the third quarter," said Kristin Reynolds, a U.S. economist at IHS Markit in Lexington, Massachusetts.

Economists had forecast housing starts rising to a 1.18 million-unit pace last month. Investment in homebuilding contracted in the second quarter at its steepest pace in nearly seven years, leading to housing subtracting 0.26 percentage point from gross domestic product growth.

IMPORT PRICES RISE

The data is unlikely to change expectations that the Federal Reserve will announce on Wednesday a plan to start unwinding its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities. Fed officials were scheduled to start a two-day meeting later on Tuesday.

The PHLX index of housing stocks .HGX was flat in line with a broadly unchanged U.S. stock market. Shares in the nation's largest homebuilder, D.R. Horton (DHI.N), slipped 0.24 percent. The dollar was trading lower against basket of currencies. Prices for U.S. Treasuries fell marginally.

Policymakers could, however, take comfort from signs that inflation is picking up after retreating in recent months. In a separate report on Tuesday, the Labor Department said import prices jumped 0.6 percent in August amid increases in the cost of petroleum products and a range of other goods.

August's increase in import prices was the largest in seven months and followed a 0.1 percent dip in July. In the 12 months through August, import prices surged 2.1 percent after rising 1.2 percent in July. Data last week showed a broad increase in consumer prices in August.

Despite the recent weakness, housing continues to be supported by a labor market that is near full employment. In addition, mortgage rates remain close to historic lows.

"We suspect single-family starts are set to slow," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "Hurricanes Harvey and Irma will also likely slow starts in coming months, as resources are redirected toward repairs and rebuilding efforts."

Groundbreaking on single-family housing projects has cooled since vaulting to near a 9-1/2-year high in February. Last month, single-family starts rose in the South and West, but fell in the Midwest and Northeast.